Nothing is easier to mangle, and harder to fix, than the Windows registry. Each time Windows 95 starts up, it creates backup copies of the registry's system.dat and user.dat files. If the registry becomes damaged, Windows 95 will try using the backup copies. Unfortunately, through the wonders of technology, it is possible for both copies of the files to become corrupted, which sounds like your situation.
Until recently, registry repair tools have been pretty much non-existent. I recommend that you try Helix Software's Nuts & Bolts system maintenance utility (Light Years Ahead: (02) 9477 6666); it's not guaranteed to solve your problem, but it may help. In addition to disk management, crash-proofing, and security tools similar to those in Symantec's Norton Utilities (Symantec: (02) 9850 1000), Nuts & Bolts offers a nice registry repair tool that could get you booting smoothly again. So does CyberMedia's First Aid 97 (CyberMedia: 1800 621 399).
If these utilities can't do the job, here's a last-ditch tactic. It's based on a file called system.1st, which is a copy of your registry from the day you first installed Windows 95; you may have to reinstall hardware that you added after the initial Win 95 installation.

Untangle registry snags with Helix Software's powerful Nuts & Bolts utility

1. To remove the hidden, system, and read-only attributes of the file called system.1st in your computer's root directory, type the command attrib -h -s -r system.1st in a DOS window. Then copy system.1st to your \Windows directory (the command copy c:\system.1st c:\windows should do it, unless Windows 95 is installed in a different drive or directory).
2. Remove the hidden, system, and read-only attributes of the system.dat file by using this DOS command: attrib -h -s -r system.dat.
3. Delete system.dat, then rename system.1st to system.dat and reset the attributes using attrib +h +s +r.
When you restart Windows, you won't get the error message.
- Scott Spanbauer